All bridging loans are not the same
Matthew Dailly (pictured) is managing director at Tiger Financial
In the world of specialist finance, bridging loans can seem like the go-to solution, as their flexibility makes them ideal for funding refurbishment projects, buying at auction, purchasing before planning permission is obtained, or when conventional borrowing channels are not suitable.
However, choosing the right financial partner is never simple, and understanding how any prospective bridging loan or development finance lender is funded should be top of the list when researching the options available.
A developer’s first reaction may be to go to a bank or mortgage company with highly competitive interest rates. If it’s a completely straightforward transaction, that may be a sensible choice, so long as they have enough time, a hefty deposit and all the paperwork to hand.
Banks will ask to see three to six month bank statements, copies of tax documents, and the last two or three years’ audited accounts. In return the developer has peace of mind from dealing with an established organisation and relatively low repayments.
Specialist short-term lenders
If a developer chooses to pursue a loan via a specialist lender, there are some things they should be aware of, before embarking on the process:
Source of funding
Some lenders use wholesale funding lines, and any deals will have to meet the specific, and often very narrow, requirements of that funding line.
Even if the lender approves the loan, the credit committee of the funding line can overrule the decision or add a lengthy delay into the process. As bridging loans tend to be needed fast, this may not be an option.
Many providers make bridging loans up from several layers of funding, such as 70% from a major bank, with an additional 20% from a hedge fund and the remaining 10% from a private investor.
It’s important to know the composition of the loan as it’s the lender of the biggest amount that makes the decisions. So, even though a developer is dealing directly with a specialist bridging loan company, a high street bank may be making the decision using their standard lending criteria – probably the very same criteria that the developer aims to avoid by going to a specialist.
Again, the process could add significant delays to the project if the application seems to be going smoothly only to fall at the final hurdle when the bank’s underwriters pull the plug.
Purchase price or value
Inexperienced developers can be sucked in by lenders advertising loans for 70% or more of the value of the property only to find that the small print “Loans are based on a percentage of value – or purchase price, whichever is lower”. Even if they have bagged a bargain at auction, they may be caught out and be unable to acquire the 100% funding that they anticipated.
However, some specialist lenders do lend solely based on the value, regardless of the purchase price, which means that 100% funding can be accessible in certain circumstances. This is why it’s critical to use an experienced broker when applying for this type of funding.
Non-status bridging loans
As is often the case with property investors and developers, they may have experienced some credit difficulties in the past. Fortunately, this is no obstacle to getting a bridging loan. Some specialist lenders offer “non status” bridging, whereby the loan is based purely on the strength of the asset, regardless of the credit profile of the borrower.
Inevitably interest rates are going to be higher than those offered by standard banks and lenders but the ease and speed of the transaction can more than compensate in many cases. Again, using an experienced broker is vital to getting the loan in front of the best lender for the developer’s individual circumstances and project type.
At Tiger Financial we have been arranging industry leading bridging loans and development finance funding solutions across residential and commercial properties throughout the UK since 2004.
We run the debt sourcing process from inception to closing, structuring and presenting deals to the lending market, negotiating terms, monitoring through credit and helping through execution. Our in-depth knowledge of lenders ensures clients secure a well-structured loan and efficiently managed financing process.